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    Why diversification alone won’t be enough to perk up Tata Global Beverages

    Synopsis

    Tea remains its main business, contributing 75% of its revenues, coffee earning around 18% and water and plantation businesses adding the rest.

    ET Bureau
    ET Intelligence Group: From being one of India’s earliest multinationals to now among its slowest growing consumer companies, Tata Global Beverages (TGB), the consumer goods business of Tata Group, has been a laggard on the Street. It’s the odd one out in the basket of consumer stocks.

    TGB made several international acquisitions in the decade of 2000 – the UK’s Tetley group, the US-based Good Earth Tea and Eight O’ Clock Coffee, Czech firm Jemca, South African Joekels Tea, Polish Tea brand Vitax and Russian Coffee brand Grand. This enabled it to become the world’s second-largest tea company, earning two-thirds of its revenues from outside India.

    Tea remains its main business, contributing 75% of its revenues, coffee earning around 18% and water and plantation businesses adding the rest. The company’s move to diversify into water, beverages, green and specialty teas and coffee retailing through Starbucks is likely to reduce its dependence on the traditional black tea business over the long term.

    Though the growth drivers are in place, the pace of execution can hamper the company’s prospects in the near term. There have to be changes made in the revenue mix, increase yields from its international subsidiaries and expand penetration of its portfolio.

    This is likely to take time and the stock may continue to remain depressed in the near term, unless the black tea market picks up. How did it miss the plot? With a bouquet of national and international brands, one would expect the company to have grown aggressively.

    But, in the past ten years, revenues have little more than doubled to Rs 7,832 crore as on March 2015. In the four of the past six years, the stock was among the worstperforming ones in the BSE FMCG Index. This is in contrast with most FMCG firms in India that have grown manifold in revenues as well as in valuations on the Street.

    Image article boday

    The global economic slowdown has impacted tea consumption, resulting in the company’s major business of black tea not growing well. The past two years have been particularly challenging – characterised by single-digit revenue growth and operating margin of 7-8%. Since 2011, it has adopted the joint venture (JV) route to roll out, albeit slowly, some of its new businesses in India.

    Nourishco, its JV with Pepsico to sell its water beverages portfolio, is growing at a slow pace. Brands launched under the venture a couple of years ago are still to reach pan-India presence. Its three-year-old JV with Starbucks is poised to be a major growth driver for the company. It was the last major trigger that pushed the stock up 77% in 2012. The stock has since then languished.

    It is the top loser in the ET FMCG Index for the past one year, down 19% even as the Index has gained 13%.


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